The discount department store (DDS) sector is one of the more challenging parts of the Australian retail landscape. Target has announced a 20% planned reduction in the number of stores over the next five years, while Big W will close 16% of its stores over the next three years. Department stores are also being tested, with retail turnover growth at a low of 0.3% (March 2019, Australian Bureau of Statistics). Both Myer and David Jones have announced future consolidation strategies. Myer plans to reduce its footprint by 30,000 sqm over the next 18 months, with further consolidation beyond that, whilst David Jones is planning a 20.7% reduction in space by 2026.

Landlords will need to explore multiple solutions to fill these large vacancies across their portfolio, most of which will require capex and downtime, but could provide opportunities for new tenants.

Option 1: Major tenant backfill solutions
Kaufland provides one solid backfill option. They have an Australian expansion strategy and are seeking to acquire and own freestanding sites. However, a shortage of suitable sites will limit the scope of their expansion and they may explore opportunities to lease space in existing centres. The standard Kaufland store format is closely aligned with a typical DDS footprint.

Option 2: Explore alternative uses
The conversion of retail space into office use is a way to reduce vacancy in shopping centres. Evidence of this can already be seen at Raine Square in Perth, where the redevelopment of the centre includes 3,000 sqm of office space for co-working provider, Spaces.

Office tenants can often be less risky than retailers, as they provide stable rent and, given the current leasing market challenges, are typically committing to longer leases than specialty retailers. Foot traffic to surrounding F&B retailers is expected to be positively impacted.

Option 3: Subdivide for specialty tenants
Landlords may look to split out the large singular tenancy into multiple smaller tenancies. This would require a substantial amount of capex. We estimate 40 shops (at 120 sqm per shop) could fill, for example, a vacated Target in a sub-regional centre. The leasing incentive cost to the landlord would be approximately AUD 8.2 million, assuming a 20% incentive. The downtime and cost of construction would be on top of this figure, so landlords would have to determine if this is a feasible option.

A downside with this solution will be the decline in overall gross lettable area due to an increase in common area. We assume an efficiency ratio of approximately 70%.

Consolidation by Target and Big W, will result in approximately 378,000 sqm of space becoming available in regional and sub‑regional centres over the next five years, equaling to 3.5% of total stock. This will have a significant impact on retail development activity. There is 353,000 sqm of developments with plans approved or submitted and due for completion over the next five years. Many of these projects are likely to be deferred as landlords seek to backfill department store and discount department store space.

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